Is it time to cash out?The kids are out of the house, and Jim and Diane Smith are taking money off the table. Should you?December 19, 2005: 11:59 AM EST
By Ellen Florian Kratz, FORTUNE

Empty-nesters Jim and Diane Smith, with son Jimmy, are planning to trade down to a smaller home.

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NEW YORK (FORTUNE) -
Jim and Diane Smith are homeowners on the edge. For the past several months they have been taking mental notes on every new housing statistic in the papers: existing-home sales, housing starts, inventories and so on.

They're not real estate pros -- Jim is an information technology executive with Marriott International -- but they have a ton of money at stake in the form of a lovely Alexandria, Va., brick colonial they purchased seven years ago for $410,000.

It's now worth just north of $1 million.

On the one hand, the Smiths can hardly believe their good luck. "In 2000, when the first house on the street went for $600,000, everyone [in the neighborhood] was high-fiving," says Jim. "By the time one went for $950,000 this summer, we all went, 'Holy cow! What happened?'"

But their euphoria is accompanied by a healthy dose of anxiety as they worry about how long the good times might last. The Smiths have decided to make the most of their opportunity and cash out: They've put their house on the market.

Yet the wisdom of this seemingly shrewd decision weighs on them. "I'm afraid prices will come down," Jim says. "Or it could be that this market may continue."

Has the real estate boom really lost steam -- or would it be smarter to hang in there and reap ever greater rewards?

One factor driving their decision is that the Smiths are about to become empty-nesters. (Their daughter is in college; one son joined the military; another son is moving to Atlanta.)

Jim and Diane, both 50, have long planned to buy a home about half the size of their 4,400-square-foot colonial.

But the truth is, they've moved up their timetable. Says Jim: "We want to get out ahead of the other guys who will be retiring in their 50s."

Edward Leamer, an economist at UCLA, applauds this kind of thinking. "If you're choosing between selling now and selling in two or three years, do it now," he says. Leamer is not predicting a market collapse, but he does not see the upside in taking the risk.

What about the notion of cashing out, waiting for the market to fall, and then buying back in at a discounted price? It doesn't often make sense. Your transaction costs are high, and so are the odds of guessing wrong.

"A lot of people had already concluded three years ago that the housing market was in a bubble and therefore didn't purchase," says David Stiff, chief economist with Fiserv CSW. "They missed out on three years of very strong appreciation."

A cautionary example: That $579,660 median-priced San Francisco home you passed on in 2002 because you thought it was inflated is now selling for $766,000.